Management of Braden Boats, Inc., is considering an expansion in the firm’s product line that requires the purchase of an additional $175,000 in equipment with installation costs of $15,000 and removal expenses of $2,500. The equipment and installation costs will be depreciated over five years using straight-line depreciation. The expansion is expected to increase earnings before depreciation and taxes as follows:
The firm’s income tax rate is 30 percent and the weighted-average cost of capital is 10 percent. Based on the net present value method of capital budgeting, should management undertake this project?
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